My wife and I have around £200,000 in our pensions and own our home outright. I am recently retired, and my wife is self-employed and still works part-time, earning around £2,000 a month.
My daughter and her husband have a fixed rate mortgage that is set to rise by about £400 a month once they have remortgaged in the summer.
We want to help them pay for it but are not sure of the best way. What is the most efficient way to help them without depleting our retirement pot?
Bank of mum and dad: Helping out adult children financially is becoming more common, but can you do it without hurting your retirement pot?
Fran Ivens at This Is Money replies: Mortgage rates shot up in October last year, mostly because of the chaos caused by markets reacting to then-Prime Minister Liz Truss’s unfunded tax cuts.
More than 1.4 million people face remortgaging to a much higher rate this year, as fixed rate mortgages locked in during periods of record low interest come to an end.
Almost six in ten deals (57 per cent) coming up for renewal in 2023 are at rates currently below 2 per cent, according to statistics from the Office for National Statistics. So your daughter is far from alone in facing a significant increase in costs, but this does not make it any easier.
Helping her cover the cost of the increase is undoubtedly generous, but you need to make sure you do so in a way that does not hurt your retirement and makes the most of your tax allowances.
I spoke to some wealth planners to find out what your options may be – as well as the pitfalls you should look out for.
Mike Stimpson, a partner at Saltus, said: ‘With interest rates increasing over the last year, those with fixed rates coming to an end could see a significant impact to their household finances. It is understandable that you would want to limit this financial pressure on your daughter.
‘Before thinking about how to help them, I would be considering what your need in retirement is. For this you should be carefully considering your guaranteed incomes and outgoings (all of them!) and whether there will be any shortfall which would need to be met by pensions.
Sharp increases in mortgage rates have left many facing a shock when they remortgage
‘Also, look forward to how this may change, so don’t just think of the situation now but in 10, 20 and possibly 30 years’ time, including potential for care costs in the future. Once you have a clear picture of your need, both now and in future you should consider the longevity of your pension pots to fund any shortfall.’
Is it a long term solution to a short term problem?
Rosie Hooper, chartered financial adviser at Quilter, said: ‘Although the £200,000 you have saved into your pensions sounds like a lot it will only be enough for you and your wife assuming around a 20-year retirement period and the state pension on top.
‘Your daughter’s increased mortgage monthly payments are not indefinite, yet your retirement provision is finite. Some fixed rate mortgages are now around 4 per cent, and, with inflation likely to drop in the next few months, we should hopefully see interest rates fall with them, further reducing rates.
‘So, you must be careful not to damage your own retirement prospects in a bid to fix a transient problem.
‘There are other ways that you might be able to help your daughter that require time rather than money. These include childcare and helping with other jobs that are currently outsourced, which ultimately will help her save money too. It may also be worth her looking if there are ways, she can maximise her own income.’
Using your tax-free gift allowance could be the answer
Stimpson also suggests using your annual gift allowance might help. You are allowed to gift up to £3,000 a year without any inheritance tax implications, or to gift out of your regular income if it is affordable.
He said: ‘When considering any gifts of any size, whether one off or regular, it is always important to consider your needs first to ensure that they are covered.
‘Therefore this may not be a suitable route if you are concerned about depleting your retirement funds. Particularly with a larger gift, raising it from your pensions could have income tax and inheritance implications that you should take advice on.’
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
Another option Stimpson suggests is to provide a loan for your daughter rather than gifting the money.
He said: ‘Rather than gifting, you could consider loaning funds to your daughter to repay some of the mortgage at a rate that is better than the market rate to help soften the financial impact, with set interest to be repaid and repayment dates.
‘While this is fairly straightforward to set up and could ensure you don’t entirely deplete your retirement funds in the long run, it does have some drawbacks. Firstly, it would need to be declared to the mortgage company as an outgoing when they remortgage, which could affect mortgage affordability calculations.
‘Secondly, as with a gift, raising the funds from your pensions to loan could have significant tax implications.’
Be careful not to lose your pension allowances
Hooper stresses that, as your wife is self-employed and working part-time, and therefore assuming you are both in your early to mid-sixties, she may still want to work for another 10 years depending on the type of job she does.
If this is the case it is crucial that she does not dip into her pension, as this will trigger what is called the Money Purchase Annual Allowance.
Under current legislation, any individual who accesses their pension flexibly triggers the allowance, with the effect of reducing their annual allowance from £40,000 to £4,000 and thereby limiting their capacity to save into a pension while still getting tax relief.
Elaine Harrison, a senior financial planner in the private client division of St. James’s Place, said: ‘Alternatively, or alongside gifting income, you could consider equity release, also known as a lifetime mortgage. This provides a method of releasing capital from the value of your home and it is not repayable until after your debt – essentially your estate becomes liable for the debt.
‘There are different types of scheme available, which may or may not suit your needs. Equity release is a specialist area of advice and not suitable for everyone and you should take financial advice before proceeding with this option.
‘However, it’s important to remember that the equity in your home should be seen as your ace card and you should not play it too early in your retirement.’
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